Developing your Skills, Financial Insights | May 16, 2013
Before you can monitor results you must determine what results you need to measure and what your targets for those measurements are. These are key items in your budget, as are the ongoing reports that you should generate to determine whether your team is on track or not.
Discussing the myriad of different items that could be measured is obviously beyond the scope of these articles. However, the following are measurements that I have found are often missed that were critical to the success of the businesses that I have managed in the past.
1. Budget for and track new sales volume and existing sales volume separately. Do not blend the two. This will require you to define what “new” versus “existing’ business is. The reasons for doing this are that:
a) The actions you take to set and achieve targets for the two are often very different (i.e. acquiring new business is usually much different from the retention and/or maximizing of existing business);
b) It better allows you to determine where you may be off plan and what actions need to be taken. Better than expected retention could be offsetting poor ‘new’ business results and you would not know this if you were blending the two;
c) Different people are often responsible for new versus existing business results. Unless you measure them separately, they do not know if they are doing well or poorly.
2. Gross margin by type of service, product line, region, customer etc., whichever is appropriate for your business. Gross margin can contain a number of components and may be as simple as sales dollars less material costs but can also include labour, shipping etc. so long as these are measured separately. Gross margin measurement in total is almost never missed, but I cannot tell you how many businesses do poorly or fail because they do not measure gross margin in sufficient granularity to know if they are pricing their products/services appropriately, and whether they are making or losing money on individual product/services, clients etc.
In my last business we provided a service that was labour intensive. One of our most useful measures was gross margin dollars per hour. This was calculated for each or our service providers and by customer. We could then allocate our variable costs (e.g. labour, fuel etc.) per hour and determine if we were making an appropriate return on the assets devoted to those clients, and which service providers were performing up to standard.
3. Cash flow versus budget. Most companies only set targets for, and monitor, profitability. Unfortunately, although extremely important, profitability is only a key component in the most important measurement – cash flow. Accordingly, not only should there be targets set for sales, expenses etc. but there should also be targets set for all items that affect cash flow – e.g. accounts receivable, inventory, accounts payable, capital expenditures, etc. Cash flow components should be monitored as closely as profitability, if not more so. Probably the number one reason that otherwise successful businesses fail is that they do not manage these items properly and then run into financial difficulty.
Upgrading the measuring, budgeting and monitoring of the above-described results in the businesses that I have managed significantly improved our decision-making, profitability and cash flow.
Should you have any questions or feedback regarding the content of this article please email me. ©
Terry Thompson, Surrey, BC, CYBF Mentor, firstname.lastname@example.org